Looking for value in the shadows of the market. I am Stockcoach, and this is my story.

Wednesday, May 17, 2006

Capitulation

Another horrible day: the portfolio was down 1.5 percent. The good news is that I think we may have hit bottom today. All my watch lists were red across the board. This suggests that there was capitulation as many small investors threw in the towel. I know there's a common perception that you shouldn't try to outsmart the market, that one should just go with the trend. I think that's plain wrong. The bulk of empirical evidence suggests that there is very little correlation week to week among the major indices. In fact, there is evidence that one could profit by buying the dips. In the meantime, I continue to use my spare cash to add to some of my favorite positions (such as DYNT, a position to which I added 6000 shares today)

Sure, the market will bounce. But what if the market indices don't go back to their highs this year? What if the bounce is just small and buying dips doesn't work anymore? What if things have shifted from "buy the dips" to "sell the rallies"? In other words, what if the secular bear is re-asserting itself in supremacy to a dying cyclical bull?